Royal Bank of Scotland boss Stephen Hester has been dramatically forced out of his job by George Osborne – but will leave the state-backed bank with a £5million pay off.

Despite RBS being 81 per cent taxpayer-owned, Mr Hester today admitted he last spoke to the Chancellor 'two or three months ago'.

In a political gamble RBS said last night its controversial chief executive would step down at the end of this year.

But his departure has spooked the City,
because the bank's shares plunged five per cent this morning over fears its
re-privatisation might now be delayed.

The surprise move came days after Mr Hester said he would ‘see the job through’ and oversee its sale.

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Going: RBS Chief Executive Stephen Hester is to stand down from his role later this year in a deal believed to have been signed off by George Osborne

Last night Government sources confirmed the Chancellor approved the change but Mr Hester denied he was 'forced out reluctantly'.

'I was ready to take the bank through
privatization, but for me that would have been the end of a journey.
I'm not feeling bent out of shape or disappointed. When I leave this job
half of me will be delighted, the other half would like to be in the
trenches with my people to finish it off,' he told Radio 4's Today programme.

George Osborne is said to have had concerns about
whether Mr Hester was the right man to see the bank through
privatisation, and over RBS’s record on lending to small and
medium-sized businesses.

There was speculation last night that Mr Hester may have been removed because he opposed the Government’s timetable for privatisation.

Downing Street said the decision for Mr Hester to stand down was a matter for the RBS board.

The Prime Minister's official spokesman acknowledged that the Government was represented in discussions on the long-term future of the bank through UKFI, the body set up to manage its shareholdings in the bailed-out banks.

'This is a decision of the board of RBS,' the spokesman said.'Boards, as you would expect, discuss future strategic planning and succession planning with their shareholders.'

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Hester said today the privatisation of RBS should start soon, but admitted it would take several years.

'The faster privatisation can start, in my view, the better. The amount of shares the Government owns is so great that I think it is most likely to take quite a number of goes to sell them all.

'The lowest price the Government paid for its current shares was £3 a share, which is roughly lower than the share price was yesterday – the highest price was £6. I think that that range can be achieved over the coming years.'

In the Commons today, Treasury minister Sajid Javid paid tribute to Mr Hester but said the time was right for him to move on.

He told MPs: 'When Stephen Hester took over, the bank was on the edge of collapse, with a broken culture, and posed a huge risk to financial stability.

'It had been bailed out by the British taxpayer at a cost of over £45 billion. Stephen Hester brought it back from the brink and since then he has worked hard to make RBS a safer and a stronger bank, better able to support its customers.'

However uncertainty about the future of the 81 per cent-taxpayer-backed bank saw its share price plunge 17.5p to 308.1p as analysts at Shore Capital downgraded the stock to a 'sell' rating.

Gary Greenwood of Shore Capital said: 'Overall, we think this announcement increases the uncertainty around the shares and potentially delays further any return of the bank to private ownership.'

The bank is also expected to announce 2,000 job losses today in the wake of Mr Hester's decision to stand down after five years at the helm.

Recruiting: RBS said that it will be searching for a successor to Mr Hester from both internal and external candidates

Deputy Prime Minister Nick Clegg defended the job losses at RBS as he said the bank needed to shrink to a 'sustainable' size.On his LBC 97.3 phone-in show, he said: 'RBS is going through a massive, massive change in which Stephen Hester has obviously played a significant part in this first episode.

AN EXECUTIVE WITH RUTHLESS AMBITION: STEPHEN HESTER'S LIFE AND CAREER

Born: 1960

Education: Easingwold School, North Yorkshire, and Oxford University

Employment:

1982 - Mr Hester takes his first job as assistant to the chairman at Credit Suisse

1996 - Appointed to Credit Suisse executive board

2002 - Joins Abbey National as finance director. He went on to become chief operating officer at the company

2004 - Mr Hester was appointed chief executive of British Land

2008 - In March he was appointed non-executive chief executive of recently nationalised Northern Rock by then-Chancellor Alistair Darling

2008 - He quit after just six months to become non-executive chairman of RBS

'It wouldn't be in existence if it
wasn't for the generosity of taxpayers ... but it needs to downsize, it
can't carry on being this huge, big, hulking, what they call universal,
bank.

'Unfortunately it does mean that
people who, for instance, have been working in the investment arm of
NatWest, which I would argue is not the absolute central purpose of a
taxpayer-funded bank, that's being shrunk down to size.'

Bank chairman Sir Philip Hampton
conceded the decision had been accelerated in recent weeks after the
Treasury made it clear it wanted privatisation to begin at the end of
2014, before the next election.

But the Treasury denied Mr Osborne had ordered RBS, which is 81 per cent state-owned, to remove him.

The
Chancellor paid tribute to Mr Hester’s role in bringing the bank ‘back
from the brink’ after former chief executive Fred Goodwin’s tenure.

Mr Hester described his five years at the helm as a ‘bruising’ experience and said he had ‘mixed feelings’ about leaving.

He
will walk away with a year’s salary of £1.6million and long-term
bonuses worth up to £4million that could take his total pay off to
£5.6million.

Government sources stressed that was far lower than a £13.3million maximum set in his contract.

But the Unite trade union said there
would be ‘a lot of anger over Stephen Hester’s tax-payer funded
multi-million pound exit package’, as it emerged RBS plans to slash
another 2,000 jobs at its investment bank, taking total job losses to
almost 40,000 since the bank’s £45.5billion bail out in 2008.

Mr Osborne praised Mr Hester for his role in rescuing the bank, slashing its balance sheet and bringing it back into profit.

He said RBS was now ‘safer, stronger and better able to support its customers’.

But he added he wanted to see a focus on giving ‘greater support to the British economy, helping businesses and job creation’.

Business Secretary Vince Cable, a
persistent critic of the banks, said of Mr Hester: ‘He performed a
necessary role at a difficult time. Going forward, RBS needs more of a
focus on small business lending.’

Under fire: RBS was criticised earlier this year for handing out large executive bonuses despite a £5.2billion loss last year

Former Labour minister Pat McFadden, a
member of the Parliamentary Commission on Banking Standards, which is
set to report on the bank’s future, said Mr Hester’s departure was not
an excuse to rush privatisation.

Fond farewell: RBS chairman Sir Philip Hampton has paid tribute to Mr Hester's time at the bank, but his tenure has been controversial

He said: ‘The taxpayer bailed out
this bank to the tune of £45billion – we don’t want to see a
pre-election fire sale to get it off the books.’

Tory MP David Ruffley, a member of
the Commons Treasury committee, said it ‘seems more than a coincidence’
Mr Hester will leave as the Government flirts with the idea of a giant
share giveaway.

He said: ‘Politicians have been getting very excited about the idea of a share giveaway – that was not Stephen Hester’s preferred strategy.

He wanted to sell the shares back into the private sector in tranches – and I have to say I share his scepticism.

‘The fact he is going at the moment when politicians are getting their sticky mitts on the bank seems more than a coincidence.’

But Treasury sources played down the idea of a rapid sell-off, saying it would take ‘many years’ to complete the privatisation, by far the biggest in history.

They said the Chancellor shared the RBS board’s view that the bank needed a chief executive who was prepared to stay on for at least five years.

The process of replacing Mr Hester is expected to take at least six months.

A BANK ON ITS KNEES: STEPHEN HESTER TOOK OVER RBS AT ITS LOWEST EBB

Outgoing boss: Stephen Hester

When Stephen Hester was appointed the non executive chairman of RBS back in 2008, he certainly had his work cut out.

The bank was on its knees, the bank had emerged as one of the biggest casualties of the credit crunch and the Government had bailed it out with £45billion of taxpayers' money.

It had become Britain's first nationalised bank.

He was replacing Fred 'The Shred' Goodwin at the helm of the bank a man once described by the Daily Mail as being 'regarded by analysts as among the most arrogant figures in the city.'

Mr Goodwin had attracted widespread media criticism for his lavish spending while chief executive of RBS, including splashing out £350million on new headquarters outside Edinburgh in 2005 and leasing a Dassault Falcon 900 private jet for occasional corporate travel.

He was also widely criticised for his role in the financial meltdown and slated in the press for the size of his pension.

Hester's remit was clear, to rid the bank of its culture of excess and steer it through the most difficult period in its history.

But he came under fire straight away from the press when it emerged that the man expected to axe lavish perks lived in a 350-acre country estate with one of the UK's most spectacular gardens and owned an impressive portfolio of property.

Mr Hester, however, has today been praised for his role at helping RBS get back on its feet and ready for privitisation next year.

Chancellor George Osborne said: 'When Stephen Hester took on the job
at RBS in 2008 it was a bust bank with a broken culture and posed a huge
risk to financial stability.

'RBS
today is safer, stronger and better able to support its customers. I
want to commend Stephen Hester for everything he has done to make this
turnaround possible.'

He added Mr Hester had 'made an important contribution to Britain's recovery from the financial crisis'.

Business Secretary VInce Cable added: 'He (Hester) performed a necessary role at a difficult time.

'Going forward, RBS needs more of a focus on SME lending and supporting the economy.'

The chairman of the very board that chose to get rid of Hester also thanked him for his tenure.

Sir Philip Hampton said: 'In the midst of a major crisis, he
accepted the challenge of stabilising the bank, turning it around, and
putting us in a position where we can begin to plan for returning the
organisation to the private sector.